Captive insurance Companies — The Ultimate Practice Tools
Many Doctors will build their wealth primarily through their professional practice. Typically, the practice is not only the vehicle that allows the client to use Leverage, but also the vehicle which creates the bulk of the client’s annual income and long-term wealth accumulation. Given this fundamental importance, it is essential that Doctors do everything possible to protect the practice and maximize its Leverage potential. The best tool for achieving such protection and Leverage is the one we will discuss in this chapter—the captive insurance company (CIC). In this chapter, we will discuss what a CIC is, what benefits it offers, and how Doctors can use it to maximize the benefits they get from their practice planning.
Early in the book, we stressed the importance of using tools that have multiple benefits. By using tools that offer multiple benefits, Doctors can compound their Leverage and achieve a number of planning goals more efficiently than if they tried to reach their goals one at a time. Of all the tools discussed in this book, the CIC can be the most efficient. For clients who own successful businesses or professional practices, the CIC often becomes the cornerstone of the ascent to a desired level of affluence. This is because the CIC affords the following benefits:
· Superior risk management for the practice.
· Reduction in the practice’s insurance expenses to third-party insurers.
· The ability to capture profits on insurance policies.
· Highest levels (+4 and +5) of asset protection for CIC assets.
· Superior income tax treatment for CIC income (when the CIC is properly structured and maintained).
· Significant estate planning benefits (when the CIC is properly integrated with estate planning tools).
· Creation of a potential buy-out mechanism for older owners of the practice upon retirement.
The CIC we will discuss here is a fully-licensed insurance company domiciled either in one of the states that has special legislation for small captive companies or in an offshore jurisdiction which has similar captive legislation. Whenever a CIC is established offshore, it is critical that the CIC be compliant with all US tax rules and must be handled by captive managers, tax attorneys, or CPAs experienced in these matters.
CIC As A Risk Management Tool
The CIC must always be established with a real insurance purpose—that is, as a facility for transferring risk and protecting assets. The transaction must make economic sense. Beyond this general rule, there is a great deal of flexibility in how the CIC can benefit its owner(s).
First, clients can use the CIC to supplement their existing insurance policies. Such “excess” protection gives the client the security of knowing that the company and its owners will not be wiped out by a lawsuit award in excess of traditional coverage limits. As Doctors, you should be concerned with all types of lawsuits—from medical malpractice to practice risks to employment liability—and this protection can be significant. Further, the CIC may even allow the client to reduce existing insurance, as the CIC policy will step in to provide additional coverage if needed. More